The brokers at Macquarie Group Ltd (ASX: MQG) reckon that the Magellan Financial Group Ltd (ASX: MFG) share price is undervalued.
How undervalued could the Magellan share price be?
Macquarie noted that Magellan shares have fallen. It's down around 25% since Magellan reported its FY21 result.
Over the past year it has fallen 46%.
The broker attributes this decline to the underwhelming returns that its main investment strategies have been generating, causing the business to trade on a lower price/earnings ratio (p/e ratio).
However, Macquarie now believes Magellan could be good value.
The dividend is one of the things Macquarie thinks will support Magellan from dropping further. Based on the broker's numbers, Magellan is expected to pay a partially franked dividend yield of 6.7% in the current financial year.
Its forward estimated earnings multiple is also lower compared to its longer-term average. Looking at Macquarie's profit estimate for FY22, the Magellan share price is valued at 15x FY22's estimated earnings.
The analysts also believe that Magellan will deliver growth of both earnings and the dividend in FY23. The FY23 expected partially franked dividend yield is 7%, whilst the Magellan share price could be valued at 13x FY23's estimated earnings.
What has been happening to performance?
For the period to 30 June 2021, the Magellan Global Fund had returned 10.8% over 12 months and 13.2% per annum over three years. However, the benchmark of the MSCI World NTR Index in AUD returned 27.5% over the prior 12 months and 14.4% per annum over the prior three years.
The Magellan Infrastructure Fund also underperformed its global infrastructure benchmark over the prior year.
In the three months to 30 September 2021, Magellan experienced net outflows of $1.53 billion, which was approximately 1.3% of average funds under management (FUM) over the quarter. That comprised net retail outflows of $617 million and net institutional outflows of $910 million.
In relation to the net institutional outflows, $1 billion of outflows were the result of three clients rebalancing their portfolios. However, all three clients were retained, each with mandates of more than $2 billion.
No institutional mandates were lost during the quarter and the global sustainable strategy secured its first two mandates during the quarter.
How did Magellan perform in FY21?
The Magellan share price started falling when it reported its report for the 2021 financial year.
Statutory net profit fell 33% to $265.2 million. There were several different elements that made up that result.
Adjusted net profit before tax and before associates rose 3% to $454.4 million.
However, its associates (namely Barrenjoey) are investing heavily for growth, leading to a loss after tax for Magellan of $41.8 million. That meant Magellan's 'adjusted' net profit after tax fell 6% to $412.7 million.
The fund manager also recorded $154.1 million of transaction costs related to strategic initiatives of $154.1 million. That included a restructuring of its global equity retail funds into a single trust.
Magellan has also launched new products like a core series of exchange-traded funds (ETFs), a sustainable fund and its retirement product called FuturePay. These new initiatives may assist with FUM, profit and the Magellan share price in the coming years.
